Carbon tax hit to steel depends on unknowns: UBS

UBS predicts the valuation impacts of a carbon tax on Australian steel could be material, but depend on unknowns.

“If compensation levels are broadly in line with the Carbon Pollution Reduction Scheme (CPRS), we estimate a valuation impact of 18-56¢/share for BlueScope and 10-19¢/share for OneSteel," UBS said.

“However, this is dependent on the starting carbon price (we assume $25/t), the carbon price once emissions trading begins and the level of government compensation provided," analysts there said.

UBS rates
BlueScope Steel
“buy" with a 12-month target price of $2.98, and rates
OneSteel
"buy" with a 12-month target price of $2.39.

UBS’s comments come after BlueScope dropped its plan to build a $1 billion co-generation electricity plant at its Port Kembla steelworks, making the project one of the first victims of the proposed carbon tax. The company’s chairman,
Graham Kraehe
, has called for steel companies to be left out of any pollution scheme until manufacturers in other countries pay a similar impost.

The Gillard government is proposing to introduce a price on carbon from July 1 next year, fixed for three to five years with an emissions trading scheme subsequently.

UBS analysts predict there is “fair probability" of a carbon tax being introduced.

“The government and the Greens may have to be more flexible on negotiations this time around or there is risk of a carbon policy not being put in place for some time," they said.

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“We see a low risk of policy reversal under a change in government, as the tax would likely have been in place for some time and should prove a material windfall gain for any future government," UBS said.

The analysts predict that compensation will need to be at similar levels to under the CPRS, or the government risks the tax being opposed, as well as losing production to other countries which don’t have a tax, the potential for job losses and a hit to gross domestic product.